The former CEO of Kmart, Charles Conaway, has been ordered to pay $5.5 million to the SEC for misleading investors about the company’s financials in the lead up to its bankruptcy in 2002.Conaway is also accused of lying under oath in court, because he disputed a $10.2 million penalty he was told to pay earlier this year.
In 2005, Conaway and former Kmart treasurer John McDonald were charged by the SEC for,
[F]ailing to disclose that Kmart had made an extraordinary and reckless over purchase of inventory.
Instead of candidly admitting the fact of the ill-advised overbuy and the significant impact it had on the Company’s liquidity, Conaway and McDonald dealt with Kmart’s liquidity problem by secretly slowing down payments owed vendors.
Conaway and McDonald deferred $570 million payments to its suppliers, then lied about why those suppliers weren’t being paid on time. Then, they underplayed the extent to which the company’s liquidity problems were ruining relations with its vendors, “many of whom stopped shipping product” to the retail giant, according to the SEC.
In March this year, Conaway was told to pay $10.2 million in disgorgement, prejudgment interest and civil penalties after a jury found him guilty of all charges. But due to a compromise that was reached while his case was being appealed, that fine has been reduced to $4.5 million.
$3 million of the total fine was for part of a retention loan paid to him by Kmart, and the remaining portion is a civil penalty.